Bridging loans are short-term finance solutions used to quickly purchase a property, often before securing a long-term mortgage.
Many property investors and landlords use bridging loans to buy properties in need of refurbishment, auction purchases, or when a quick transaction is needed.
Once the property is ready for rental, converting the bridging loan into a buy-to-let mortgage can provide a long-term financial solution.
When Should I Convert a Bridging Loan?
A bridging loan is usually expensive because it is designed for short-term use. Converting it into a buy-to-let mortgage makes sense when the property is ready to be rented out and the owner wants a more affordable repayment plan.
So when developers are buying a property using a bridging loan and renovating it, because they don’t want to be tied down to the higher bridging rates for too long, once they have finished renovations, they will convert the loan into a buy to let mortgage. This is more affordable and then they can charge rent to the tenants, which essentially covers the monthly buy to let mortgage repayments and pays around a 20% margin on top (or higher).
A common scenario is buying a run-down property with a bridging loan, carrying out improvements, and then refinancing onto a buy-to-let mortgage once the property meets lender requirements.
Once the value of the property has increased, it means that the LTV is now going to be more favourable for the borrower and therefore they will own more of the property and can get better rates on their new BTL mortgage.
As Part of An Exit Strategy
According to UK property finance data, over 65% of bridging loan borrowers use refinancing as their exit strategy.
Many investors do this after completing renovations or increasing the value of the property. This transition, known as “exit strategy,” is an important part of property investment planning.
What Are The Benefits of Converting to a Buy-to-Let Mortgage?
One of the main benefits is the lower interest rate. Bridging loans can have rates as high as 1% per month, whereas buy-to-let mortgage rates are much lower, making monthly payments more affordable.
Another advantage is financial stability. A buy-to-let mortgage provides a long-term repayment plan, helping landlords manage cash flow and rental income more effectively.
By refinancing onto a buy-to-let mortgage, landlords can also release equity from the property. If the property value has increased after improvements, a higher mortgage amount can be secured, which may provide additional funds for future investments.
Things to Consider: Rates, Timing, and Eligibility
Timing is crucial when switching from a bridging loan to a buy-to-let mortgage. Most bridging loans are arranged for 6 to 12 months, so securing a mortgage before the loan term ends is important to avoid high penalty charges. Lenders usually require proof that the property is suitable for rental, including necessary safety checks and a stable rental income estimate.
Interest rates on buy-to-let mortgages vary depending on deposit size, rental income, and the borrower’s financial history.
A higher deposit often results in better mortgage rates. In the UK, typical buy-to-let mortgage rates range from 3% to 6%, which is much lower than bridging loan rates. According to financial reports, the average buy-to-let mortgage rate in 2023 was 5.12%, reflecting the impact of recent interest rate changes.
Another key factor is lender criteria. Not all buy-to-let mortgage lenders accept properties that were initially purchased with a bridging loan. Some require a property to have been owned for at least six months before refinancing. Checking lender requirements early can prevent delays.
Some individuals put the house in their children’s name to avoid inheritance tax. This can be an interesting approach but all legal and formal procedures must be taken to ensure that it is legitimate and not just a tax avoidance move.
Final Thoughts
Converting a bridging loan into a buy-to-let mortgage is a common strategy for property investors looking for a long-term financial solution. It reduces costs, provides stability, and allows landlords to generate rental income while managing mortgage repayments effectively. Planning ahead, understanding lender criteria, and securing a mortgage before the bridging loan expires are key steps to ensuring a smooth transition.
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